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Roger J Kerr sees "massive changes" at the Bank of Japan, more action to get the economy going after years of slumber. Your view?

Currencies
Roger J Kerr sees "massive changes" at the Bank of Japan, more action to get the economy going after years of slumber. Your view?
19th Nov 12, 1:50pm by Roger J Kerr

 By Roger J Kerr

Events and trends in Japan have largely been irrelevant to interpreting and analysing global forces on the NZD/USD exchange rate over recent years.

The total focus has been on investment market “risk-on/risk-off” moods, European blow-ups/risk aversion that have this year caused safe haven capital flows towards the AUD and NZD, commodity price shifts and Chinese economic developments.

The aforementioned forces determine Aussie dollar movements and the NZD/USD rate follows the AUD/USD exchange rate.

However, there is now a fresh wind of change blowing through political and economic corridors in Japan that will have direct implications for our currency market and values.

Outside political changes and events in Japan, there appears to be massive changes taking place at the central bank, the Bank of Japan (BoJ), to take more affirmative action to get the economy going after years of slumber.

Central to those changes is the recognition and need for a weaker Yen exchange rate against the USD.

Current BoJ Governor Masaaki Shirakawa is due to step down in April and this will allow the new broom to embark on bond buying and money printing that the Japanese have only played at to date.

The Yen has always strengthened over the past three to four years since the GFC when investment market volatility has increased and Japanese institutions have rapidly return money to the “safety” of home.

Over recent months volatility in investment and financial markets has decreased substantially and the Yen is slowly losing its status as a safe haven currency to retreat to.

Adding to the widely anticipated and inevitable Yen currency weakness is the possibility of Japan suffering another sovereign credit rating downgrade to below their current AA- level. Such a downgrade would force local investment houses to send funds out of Japan to higher rated securities.

The Yen has already weakened from 77.50 to 81.50 against the USD and appears destined for further weakness towards 85.00 in the lead up to their general election on 16 December.

The political uncertainties are real and their monetary policy is becoming much more aggressive.

There is even talk of sub-zero interest rates for loans to encourage economic activity and investment - that is, you get paid to borrow money.

When official policy gets to this point it is very hard to see the currency strengthening.

The correlation between the JPY/USD exchange rate and the AUD/USD rate has been forgotten about as Chinese drivers of the Aussie currency and economy have dominated. However, Australia still depends heavily on Japan and the Aussie looks likely to follow the Yen to a lower value against the USD (see chart).

Yen connected currencies such as the Singapore dollar and Thai Bhatt can be expected to weaken against the USD along with the Yen.

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* Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

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7 Comments

by  Stephen L  |  19th Nov 12, 2:19pm 1353287952

Roger,

I understand some high profile Japanese businesses are struggling (e.g. Panasonic's recent $10 billion annual loss), competing with Chinese and Korean cheaper labour and improving technology.

Nevertheless Japan still has a current account surplus of ~NZ$ 75 billon for the first 9 months of this year, so say $100 billion annualised. They therefore have to invest that sort of amount offshore, or print the same amount, to keep their currency from appreciating, let alone go down. 

For the global economy, the best way for them to get their currency down is for them to start consuming more, not to embark on some sort of austerity drive along with massive printing. And for NZ, we should be wary of surplus countries, like Japan, manipulating their currencies by forcing their surpluses, or printed currency, on us. May seem fun at the time, but such capital transfers merely encourage us in to further debt and loss of wealth, partly by keeping our currency unsustainably high. Of course they won't not do printing because we have an issue with it; so we need to keep considering what is our best response in the face of such actions around the world.

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by  speckles  |  19th Nov 12, 2:37pm 1353289062

They are not going to consume more, take a look at their main retail shopping areas in Japan...they are so de stocked...even if you wanted to buy something it isn't that easy.

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by  Stephen L  |  19th Nov 12, 7:24pm 1353306256

speckles,

Am sure you are right, but that is largely the point. They need to finally get the deflation bug bear off their back, and start consuming. That would soon get some stuff back on their shelves. They may be trying with their huge fiscal deficits, but I suspect whatever tax shortfalls that implies, are not going to people who will spend; they merely end up with investors- most of whom reinvest back with their government, but some of whom send it our way. Not really helpful.

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by  Belle  |  19th Nov 12, 3:02pm 1353290576

"There is now a fresh wind of change" That comment in context with the rest of your article is hilarious Roger. To write an update on what is going on in Japan and not mention that their nuclear industry is in total meltdown is plain ridiculous. Fresh wind of change...? More like a plutonium wind of death. They have one plant left going, of which they have discovered it is on a major fault line. Their main means of operating ie nuclear power generation is rooted.

Which is a minor detail compared with Fukushima which will now never stop giving.

I could list a long long list of websites for you to visit to contemplate the new and well roasted Japan.  However I must move on, much to do today. I just had to point out that if thats all you can come up with as a currency man, economist, you need to brush up on your chemistry as well, and check out what a little of that plutonium or strontium, or caesium, or uranium etc has to  offer the poor folks of Japan. Nearly a quarter of their country is buggered. Tokyo is getting worse by the day, and at some point when the reality of the situation takes hold, what then for the yen?  

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by  Stephen Hulme  |  20th Nov 12, 11:16am 1353363405

Central to those changes is the recognition and need for a weaker Yen exchange rate against the USD.

 

What say the US current account dynamics are as Hussman explains?

 

The 'US investment falls off a cliff' story is gaining momemtum. Read here and here. 

 

Japan moves towards annual current account deficits.

 

Surely these forces see USD lower, Yen higher?

 

A little background analysis into the impact of shadow banking upon US current a/c deficits might be useful - FSB latest  and the German Landesbanks and how they helped fund the US c/a.

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by  Ralph  |  20th Nov 12, 11:57am 1353365831

Good link to Hussman, a man who does straight thinking.  It does seem popular at the moment to treat floating exchange rates as causes and not symptoms.

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